UK residency: No Gaines for taxpayer in Supreme Court ruling

The Gaines-Cooper case has been a catalyst for a much needed statutory residence test to bring clarity and certainty to an area governed largely by case law and HMRC guidance, says Stuart Long, head of tax at law firm Howard Kennedy.

After a thirteen-year long residency dispute between Seychelles-based British millionaire Robert Gaines-Cooper and HMRC, the Supreme Court has found in favour of the taxman.

The case concerned the interpretation of HMRC's now defunct IR20 guidance on when an individual becomes non-resident and not ordinarily resident in the UK.

Gaines-Cooper, who migrated to the Seychelles in 1976, argued IR20 contained a more benevolent interpretation of those circumstances than was reflected in the ordinary law, and, as such, a legitimate expectation arose that this interpretation would be applied by HMRC.

He argued that - despite retaining links with the UK - by spending less than 91 days each year in the country he had satisfied the requirements of HMRC published practice.

However, the Supreme Court held that a proper construction of IR20 did not support Gaines-Cooper's argument.

Although the guidance on how to achieve non-residence "should have been clearer", it was nevertheless enough to inform a sophisticated taxpayer that to achieve non-residence a "distinct break" in the pattern of the taxpayer's life in the UK was needed.

Gaines-Cooper will now consider whether to take his case to the European Court of Justice. In the meantime, those leaving the UK who might otherwise have retained valuable investments here will be reluctant to do so.

The case has been a catalyst for a much needed statutory residence test, which is expected from April 2012. In draft form at present, it is intended to bring clarity and certainty to an area governed largely by case law and HMRC guidance.

But taxpayers will not be free from existing case law and HMRC guidance for many years to come, as the existing position will continue to be relevant in determining under which part of the statutory residence test a taxpayer will fall.

Next year, the residency status of a taxpayer in a particular tax year will be determined by reference to their residency status in the three previous tax years.

The old law will, therefore, be directly relevant up to and including tax year 2014/2015 and, by virtue of the perpetual examination required of the three preceding years to any one tax year, will continue to be indirectly relevant for decades.

A statutory residence test is to be welcomed and the current draft, while complex, should offer a degree of clarity.

But taxpayers will still need to consider the effect of the current law and practice going forward and, unless Gaines-Cooper successfully appeals his case at the European Court of Justice, all will continue to be subject to the effects of this unwelcome Supreme Court decision.

Stuart Long is a partner and head of tax at Howard Kennedy LLP